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May 26, 2015

In a recent press release, the CFPB announced a public inquiry into student loan servicing. The CFPB is seeking information about: “industry practices that create repayment challenges, hurdles for distressed borrowers and economic incentives that may affect the quality of service.” According to the CFPB, student loans account for the nation’s second largest consumer debt market. The agency states there are more than 40 million federal and private student loan borrowers and those consumers owe more than $1.2 trillion. About $240 billion in such loans are either in default or forebearance.

The CFPB is acting because of numerous borrower complaints about their loan servicers. Complaints include billing problems associated with payment posting, prepayments and partial payments. Borrowers have stated that payments have been processed in ways that make their borrowing more expensive. Servicers are also accused of losing records and slow response times to fix errors. The CFPB thinks student loan servicers fail to provide adequate customer service because they are typically paid a flat fee for each loan so they have no incentive to maintain high standards of serving.

Unlike credit card and mortgage servicers, no comprehensive system for overseeing the student loan servicing industry currently exists, according to the CFPB. Given the CFPB’s penchant for promulgating more and more regulations, we believe this heightened scrutiny by the CFPB will lead to numerous new regulations affecting the student loan servicing industry.

Student loan servicers are not the only entities being investigated by regulators. Illinois Attorney General Lisa Madigan recently sued five companies for allegedly scamming people who were trying to repay student loan debt. AG Madigan contends that the five companies charged the former students high upfront fees while falsely promising that the companies could help the borrowers repay their debt. In one case, for example, the AG alleges that a borrower signed up and was pressured into paying $650 in upfront fees based on a promise that the company could reduce her monthly payment to as low as $50. The company, however, later told her it could not lower the monthly payment as promised in the sales pitch.